Why Did Fidelity Send Me a Check for My 401K?

Receiving an unexpected check from Fidelity related to your 401(k) can be surprising and confusing. Understanding the reasons behind this financial transaction is crucial, as it may affect your retirement planning and tax situation.

Various circumstances could lead to such a payment, each with different consequences. Let’s explore these scenarios to clarify why you might receive a check from your 401(k) account.

Plan Closure or Termination

When a 401(k) plan is closed or terminated, funds are distributed to participants. This can happen due to a company merger, acquisition, or a change in retirement plan providers. In these cases, the plan sponsor must distribute the assets, which could explain why you received a check from Fidelity. This process is governed by the Employee Retirement Income Security Act (ERISA) to ensure fair distribution.

If the distribution isn’t rolled over into another qualified retirement account, such as an IRA, it may be subject to income tax and possibly an early withdrawal penalty if you’re under 59½. The IRS allows a 60-day window to complete a rollover to avoid taxes and penalties, so it’s important to act within this timeframe to make informed decisions about your retirement savings.

Forced Rollover or Automatic Cash-Out

When employees leave a company, they may lose track of their 401(k) accounts, particularly if the balances are small. For accounts under $1,000, plan administrators like Fidelity may initiate an automatic cash-out, issuing a check directly to the participant. This can come as a surprise if the former employee was unaware of the plan’s terms. This practice complies with Department of Labor regulations, which help streamline the management of small accounts.

For balances between $1,000 and $5,000, a forced rollover may occur, transferring funds into an IRA established in the participant’s name. This approach preserves the tax-deferred status of the savings and prevents unexpected tax liabilities. Keeping your contact information updated with former employers and plan administrators can help avoid confusion regarding these transactions.

Required Minimum Distributions

As individuals approach retirement, required minimum distributions (RMDs) become relevant. Under current tax law, RMDs must begin by April 1 of the year following the year you turn 73. This ensures the government collects taxes on retirement savings that have grown tax-free. The RMD amount is calculated based on the account balance at the end of the prior year and life expectancy, as outlined in IRS guidelines.

An unexpected check from Fidelity could be due to an automatically processed RMD. Many financial institutions offer automatic RMD services to help clients comply with IRS regulations. Failing to take an RMD can result in a 50% excise tax on the amount not withdrawn. Automatic distributions help account holders avoid these penalties.

Excess Contribution Removal

Occasionally, individuals contribute more than the annual limit set by the IRS—$22,500 for those under 50 and $30,000 for those 50 and older in 2023. When this occurs, the excess must be corrected to avoid tax complications. Fidelity may issue a check to remove the over-contributed amount, known as a corrective distribution.

This process includes both the excess amount and any associated earnings, which are taxable in the year the contribution was made. The excess itself is taxable in the year it is withdrawn. These tax implications highlight the importance of adhering to contribution limits and addressing errors promptly.

Overpayment Adjustments or Corrections

Errors in contributions, employer matches, or plan administration can lead to overpayments in a 401(k) account. These discrepancies often result from payroll errors, misapplication of plan rules, or administrative oversight. When overpayments are identified, plan administrators like Fidelity are required to correct them, which may involve issuing a check to the participant.

For example, if an employer contributes more than the allowable matching amount, the excess must be returned. If the overpayment has already been allocated to the participant’s account, it may be distributed back as a corrective payment. These adjustments often include documentation explaining the reason for the correction and any potential tax implications. Participants should carefully review these notices and consult a tax advisor to understand how the correction might affect their tax liability.

If the overpayment generated investment gains, those gains might also be distributed back. This ensures the account balance reflects only legitimate contributions under the plan’s terms.

Unclaimed or Forgotten Balances

Unclaimed or forgotten 401(k) balances are another reason Fidelity might send a check. This often occurs when individuals leave an employer and lose track of their retirement accounts, particularly if the balances are small or the accounts weren’t consolidated after changing jobs. Plan administrators are required to manage these dormant accounts, which may include issuing a check to the account holder.

If the account is deemed abandoned, funds may be distributed directly or rolled into an IRA in the participant’s name. If the participant cannot be located, the funds may eventually be turned over to the state under escheatment laws. Receiving a check in this scenario is often a last attempt to return the funds before escheatment occurs.

To avoid such situations, maintain accurate records of all retirement accounts and update your contact information with former employers and plan administrators. Consolidating old 401(k) accounts into a single IRA or a current employer’s plan can simplify management and reduce the risk of losing track of funds. If you receive a check for a forgotten balance, verify its legitimacy and consider reinvesting it into a retirement account to preserve its tax-advantaged growth potential.